Translated material
Mortgage litigation
Barclays accuses Bear Stearns of fraud
British bank Barclays has filed a lawsuit against American investment company Bear Stearns in connection with the collapse of two of its hedge funds. In one of them, Barclays was the sole co-shareholder. The complaint alleges that Bear Stearns concealed negative financial information about the fund's funds backed by subprime mortgages. According to the British bank, these hedge funds were used to dump distressed assets . In addition, Bear Stearns yesterday reported significant quarterly losses that were several times higher than analysts' expectations.Barclays Bank PLC, the third-largest bank in England, has filed a lawsuit against Bear Stearns Cos., Bloomberg reports. in Manhattan federal court, accusing the investment company of fraud and conspiracy. A February email from a senior managing director at Bear Stearns Asset Management Inc. is quoted. Matthew Tannina at Barclays, which said the fund "is having its best month ever." According to Barclays, by that time the fund had serious liquidity problems, and Bear Stearns Asset Management had long known that the underlying assets of the High-Grade Structured Credit Strategies Enhanced Leverage Fund were worth much less than the stated amount and were at serious risk of further losses. Barclays believes Bear Stearns used the fund to dump distressed assets it could not sell to other investors. In May, the fund paid $500 million for a large portion of the riskiest assets controlled by Bear Stearns Asset Management, although it promised Barclays not to acquire such securities.
In mid-July, Bear Stearns reported that investments in two of its investment funds operating in the subprime mortgage market were effectively worthless. In one of the funds there was no money left at all, in another the price of one dollar invested by investors turned into 9 cents. At the same time, as of March 31, the first of the funds, High-Grade Structured Credit Strategies Enhanced Leverage Fund, had a capital of $638 million, and the second, High-Grade Structured Credit Strategies Fund, had $925 million. The funds faced unprecedented losses on bonds that had the highest ratings - AAA and AA. In early August, the company said it had barred investors from withdrawing money from the third fund. It had about $900 million under management, and only 0.5% of its assets were subprime mortgage-backed securities. Despite this, investors sought to withdraw their funds.
The defendants in the lawsuit are Matthew Tannin and the manager of the fund in which Barclays invested, Ralph Cioffi. He left Bear Stearns last week. U.S. federal prosecutors and the Securities and Exchange Commission are investigating, suspecting Mr. Cioffi of siphoning his own money out of the fund before its collapse.
On December 5, The Wall Street Journal reported that New York State prosecutors had asked certain companies to testify about the sale of securities related to subprime mortgages. In addition to Bear Stearns, these companies included Merrill Lynch and Deutsche Bank. These actions by prosecutors are only part of a broader investigation into mortgage lending practices. According to the newspaper, the prosecutor's office is trying to find out how adequately investment banks assessed the quality of mortgage loans before forming them into products that were then sold to investors. It also requested information on how the bonds were securitized, including information on the banks' relationships with rating agencies. In addition, the US Securities and Exchange Commission has launched more than 20 similar investigations.
As Bear Stearns reported in a press release yesterday, it suffered significant losses in its fiscal fourth quarter not only due to write-downs of mortgage-related losses, but also from lower fixed income revenue. For the period ended Nov. 30, losses totaled $854 million, or $6.91 per share. The losses were much larger than analysts had predicted (about $1.82 per share). In the history of the investment bank, which has been public since 1985, this is the first unprofitable quarter. During the same period last year, the company was able to earn $563 million, or $4 per share. Bear Stearns also announced yesterday that it would write off about $1.9 billion in losses related to structured debt backed by real estate. The company previously reported that it could write off assets by $1.2 billion.
The investment bank's losses on mortgage debt completely covered the profits from operations with securities and bonds. Bear Stearns' securities revenue fell 11% to $384 million. Investment banking revenue fell 44% to $205 million. Clearing revenue rose 2% to $276 million.
During its fiscal fourth quarter, Bear Stearns advised on $47 billion in mergers and acquisitions, nearly tripling the year-earlier figure. The company acted as an underwriter for the issue of bonds for $7.3 billion, which is 17% lower than the previous year. Bear Stearns also helped place $1.18 billion in shares, down 28% from last year.
Morgan Stanley Chief Executive Officer John Mack's strategy has drawn criticism and his position has been shaken by the bank's disclosure of $9.4 billion in losses on subprime mortgages. Morgan Stanley's losses indicate the failure of Mr. Mack's approach to business, writes The Wall Street Journal. Morgan Stanley, the second-largest US investment bank, posted a loss of $3.56 billion in the fiscal fourth quarter for the first time since going public in 1986. Significant losses associated with suprime mortgages forced the bank to attract funds from the Chinese state fund China Investment Corp. (CIC) in the amount of $5 billion to maintain capital levels. As a result of this transaction, CIC will own 9.9% of Morgan Stanley shares. Morgan Stanley became the fourth of the world's largest banks to publish data on significant cash write-downs. Heads of Citigroup Inc., Merrill Lynch & Co. and UBS AG left their positions after the disclosure of serious losses. INTERFAX-AFI